Can Russia bear up?

By Ronan McCaughey
August 7, 2015

Russia’s life insurance market grew significantly following the global financial crisis of 2008-2009 – with the sector’s gross written premium increasing from RUB16.5bn ($263.6m) in 2009 to RUB84.9bn in 2013, according to a Timetric report, Life Insurance in Russia, Key Trends and Opportunities to 2018, which is available at the Insurance Intelligence Center (IIC).

The primary reasons for the substantial increase in gross written premium were a rise in public awareness regarding life insurance products, an increase in employment, and the government’s implementation of several laws to develop the insurance industry.

Looking ahead, the IIC report forecasts the Russian life insurance market is expected to more than double from RUB 84.95bn in 2013 to RUB 208.4bn in 2018.

The IIC report explains that among the key trends and drivers are:

An openness to FDI

Capturing untapped customers through banks

Russia’s large labour force For example, in 2012, Russia had a population 142.5 million, making it the ninth-most populous country of the world.

As the labour force purchases more profitable life insurance products in comparison to the rest of the population, this highlights the number of potential buyers.

Due to financial education and an increasing awareness surrounding the need for life insurance, potential buyers areexpected to purchase more insurance over the forecast period

Valeria Ermakova, a financial analyst at A.M. Best, explains that in 2014, the life market in Russia increased by 28%, compared to growth in the non-life market of only 7%.

Ermakova, says: "It is worth noting that this g rowth was driven by a single market participant, Sberbank Life Insurance, which increased its life premiums by a factor of four. If this insurer’s premiums are removed from the calculations, A.M. Best notes that the market declined by approximately 5%."

Nevertheless, the imposition of economic sanctions imposed by the EU and US on Russia has impacted the Russian financial services sector, and there are calls for a reduction in available credit within Russia.

Elvis Picardo, vice president-research and a portfolio manager at Global Securities Corporation in Vancouver, explains in Investopedia that the economic sanctions are focused on Russia’s key defense, energy, and financial service sectors, and include asset freezes, controls on financing, restrictions on access to capital markets, controls on dual-use items, and controls on goods and services for the Russian military.

Picardo writes: "Severely impacted by the one-two punch of sanctions and sliding oil prices, the Russian economy shrank 0.5% in November 2014, the first contraction in five years.

On 16 December 2014, Picardo notes that the ruble’s value dropped 20%, trading at a record 80 rubles per US dollar, after the Central Bank of Russia increased interest rates by 6.5 percentage points –from 10.5% to 17% – in an attempt to stop a run on the currency.

Picardo says The massive and unexpected rate hike by the Russian central bank was meant to demonstrate its resolve to support the ruble.

Victor Nikolskiy, associate director of financial institutions ratings at Standard and Poor’s in Moscow, highlights the link between rising interest rates and the Russian life market.

Speaking to Life Insurance International: "If we look a couple of years back, the life sector was growing very rapidly. "However, the explanation for this is that it started from a very low base. For example if we look at the percentage of GDP, the market would be less than 0.2% GDP, while for the non-life sector that would be significantly higher at 1.2% to 1.3% of GDP."

Nikolskiy adds: "In the first half of 2015 we saw very high interest rates on the market, driven by the Central Bank key rate, which was very high a t he end o f l ast year."

"Here in Russia about 50% of the market is connected to growth in the lending sector. What we are seeing is that loan portfolios are not growing and, at best it will stagnate."

Daniel Staib, senior economist at Swiss Re, and author of a Swiss Re Sigma report: World Insurance 2014: Back to Life, agreed.

He wrote that in Russia, life insurance showed some resilience to last year’s economic challenges, up 19% in real terms, although this was below the average of the previous two years. The premium growth in Russia was driven by sales of credit-related products.

However, he added: "Premiums in Russia are expected to decline steeply in 2015."

The situation is reflected in Russia’s reinsurance market. With the potential for further sanctions, there is uncertainty amongst the county’s western reinsurers, which could conceivably be forced to withdraw.

A M Best’s February report, "Insurers’ Prospective Growth Dampened by Geopolitical Conditions" said a withdrawal of international reinsurance capacity could contract Russia’s insurance sector, due to lack of an alternative to support underwriting exposure.

Despite the impact of the economic sanctions, there are brighter points to financial markets in Russia.

In September 2013, for example, the Central Bank of the Russian Federation became the entire country’s financial market regulator. This was through transferring a range of functions previously performed by the Federal Financial Markets Service.

As well as supervision of commercial banks, the function of the new single regulator includes the regulation and monitoring of Russia’s non-bank financial institutions, including asset management companies, pension funds, brokers and intermediaries, and insurers.

Nikolskiy comments: "The regulator has become much more focused on insurance.

"We have only recently moved to the Central Bank becoming the regulator of the whole financial sector, including insurance. The number of initiatives the central bank is moving forward is really significant compared to the number a few years ago.

"The regulator is starting to clean the market of small companies which were not particularly solvent. It has started to bring in initiatives in terms of obligatory lines, increasing tariffs and changing limits.

"It has begun doing things in the markets that have been long awaited and that have not been done for ten years."

Ermakova is positive on the regulatory moves, noting that any legislative initiatives that would affect the life segment will be more timely, as the Central Bank has more power over the financial markets.

However, she adds: "The legislative framework will have to be strengthened substantially in order to promote life products, particularly unit-linked offerings, and to protect the interests of policyholders.

There have been discussions recently about introducing some form of government guarantee in the event of a life insurer insolvency."

On a brighter note, she says: "On the other hand, it is suggested that the corporate life and pensions segments willcontinue to demonstrate growth, as large Russian corporations and foreign subsidiaries are implementing new staff retention programmes. However, corporate business remains an insignificant part of the life market."

Government focus

The life insurance sector has been identified as important by the Russian government and currently, it is trying to promote life insurance and to further develop the financial literacy of the population, in order to attract investments in the country.

Traditionally, Russia has seen a low market penetration of life insurance. This has been driven by several factors, including a hangover remaining from the cultural aspects associated with former communist countries.

In short, there remains an expectation amongst some elements of the public that the state would look after itspopulation from cradle to grave.

Additionally, the public has been discouraged from holding life and savings products by the history of the near past and high inflation levels, which have fostered distrust in the financial system as a whole.

Nikolskiy comments: "In terms of Russian citizens, I would say that a lot of them are still treating insurance as a kind of tax.

"If we see that disposable income is dropping and that insurance expenses are kind of on top of the spending pyramid, this basically means people are trying to save on insurance.

"We can already see this. It interesting that some products with a deductible have become very popular on Russian markets, when these products were not very popular before."

Whatever the opinion to insurance in general, Ermakova remains positive: "The popularity of life products with private individuals is also expected to increase.

"With the current interest rates in place (around 11.5%), most people consider bank deposits as a more attractive way of investing their funds. In this respect, the market welcomed recent changes to the legislation which meant that from January 2015, individuals purchasing life policies for a period of five years and more will beable to claim tax deductions within a specified limit."

Looking ahead, the Swiss Re report notes that with consumer confidence in free fall because of rouble weakness dueto the crisis in the Ukraine, surging inflation and interest rates, the consumer credit boom is due to reverse. This will affect sales of life products in Russia.

A.M. Best also expects a slowdown in the life sector’s rate of growth, reflecting the expectation that the availabilityof credit will be substantially reduced in coming years.

The only creditable conclusion is that Russian life markets are, in their own limited terms in a good position for growth.

Products have shown popularity in a market beginning form a low base, with the corporate sphere almost virgin territory.

The reinsurance market is currently met through western players, bringing a wealth of expertise to what remains a new market, while the current regulator looks to be reining in and cleaning up the more risky edges of Russian financial markets.

This can only increase public confidence in financial products.

In effect, the only fly in the ointment is the current financial situation, one that will inevitably require a political solution if Russia’s life sector is to renew its stellar growth path.

Data from the Timetric report, Life Insurance in Russia, Key Trends and Opportunities to 2018, which is availableat the Insurance Intelligence Center, explains that bancassurance was the most popular channel for life insurance companies during 2009-2013.

Sales through bancassurance are expected to continue their positive growth, at a CAGR of 13.5% over 2013-2018.

Agencies were the second-most-popular distribution channel among life insurers in Russia. Gross written premium new business collected through agencies increased from RUB5.3bn in 2009 to RUB13.9bn in 2013, at a CAGR of 27.5% during the review period.

Other key distribution channels in the life segment include brokers and other channels, which sold 2,533 and 169,482 policies respectively in 2013.

Sales through brokers and other distribution channel are projected to rise to reach 4,666 and 319,252 respectively in 2018. Other distribution channels include call centres, grocery stores and shopping malls.

Regulatory fast facts

– The Russian insurance industry is supervised and regulated by the Bank of Russia Financial Market Service (BRFMS)

– Composite insurance is prohibited in the Russian insurance industry

– Foreign direct investment is limited to 49% to operate in life and certain other classes of insurance. However, there is no fixed limit for FDI in Russia.– Non-admitted insurance is not permitted in the country. However, there are a few exceptions to it.

Viewpoint: Timetric insurance analyst Laura Balkarova

The Russian life insurance market is in a nascent stage of development, both in terms of size and the range of products available.

Life insurance has remained, however, the fastest growing category of insurance sales in Russia. Gross written premiums in the segment reached an all-time high in 2014, totalling an estimated RUB108bn ($1.7bn) and rising from RUB23bn in 2010, according to The Russian Association of Life Insurers.

The share of the category in the total Russian insurance market increased from 2.2% in 2010 to 10.7% in 2014.

However, market growth slowed from 57.8% in 2013 to 27.2% in 2014 as Russia’s economic stagnation hit consumer lending volumes and the sales of credit life insurance through the dominant bancassurance channel.

Life insurers expect to see an improvement in the demand for endowment and with-profits life insurance products, which will compensate for the decline in sales of loan or mortgage protection policies.

The life insurance market is forecast to expand by a further 10-15% in 2015, with gross written premiums expected to reach around RUB115-120bn a year.

In January 2015, the Russian government introduced new rules which will allow individuals to claim tax deductions in the amount of premiums paid under voluntary life insurance plans with a minimum term of 5 years.

Providers are expected to diversify sales away from bancassurance and develop their agency networks, which together with the new tax incentives may help them sustain life insurance sales amid uncertain economic cond